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IF soy briefing


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IF soy briefing

  1. 1. PAGE 1 sustainable production of the commodity. Figures from CDP show that deforestation risks associated with soy are being overlooked by companies, although the risks are similar to those presented by palm oil for which 96% of the market is now covered by zero deforestation commitments. Some 37% of companies responding to CDP’s forests programme do not report on soy despite stating that they produce or use soy compared to 19% of respondents that do not report on palm oil despite stating that they produce or use palm oil. Yet soy is the most traded agricultural commodity in the world. It is the largest global source of animal protein feed, as well as the second-largest source of vegetable oil and can also be turned into fuel. Demand has grown by around 70% in the last decade and that growth is driven by the growth of emerging markets and the emergence in these markets of a new middle Soy is one of the biggest commodities in the world. Global production is expected to be around 320m tonnes for 2015-2016, according to the US Department of Agriculture. It faces many of the same sustainability issues as palm oil, most notably deforestation, but there is far less awareness of the challenges the sector faces. In part this is because while palm oil is a primary ingredient in a vast range of products from food to cosmetics, soy is far less visible in the supply chain. Even though there is an almost perfect correlation between soy demand and meat, chicken and dairy production, many retailers and brands are not aware of its role in the production of their product, according to the Round Table on Responsible Soy (RTRS), an industry organisation that promotes more SECTOR SNAPSHOT – SOY Soy: the forgotten commodity, for now? With growing global demand for soy – and few companies reporting on supply chain risks associated with it – there is a real possibility the commodity will suffer a similar fate of challenges still being endured by the palm oil sector Essential insight • Massive commodity markets can still operate under the radar. Despite being one of the world’s biggest commodities and facing similar sustainability challenges to palm oil, there is less visibility and awareness of soy. • Companies are overlooking risks associated with soy sourcing; 37% of companies responding to CDP’s forests programme do not report on soy despite producing or using it. • In the right circumstances, certification can help sustainable supply chain momentum. Sales of certified soy are growing, doubling between 2014 and 2015. • However, sales of sustainable soy credits (2m tonnes) are much higher than sales of physical soy (0.25m tonnes) leading to accusations of greenwashing. • Challenges in 2016: with the Brazil soy moratorium coming to an end, regulatory risk and possible disruption to supply could mean higher operating costs, lower margins and price volatility. SUPPLY CHAINS IN FOCUS Demand for soy has GROWN70% INLASTDECADE 320MTONNES of soy was produced globally in 2015-16 Expert commentary “Companies now need to implement their commitments in all the places they produce or source commodities. In some countries this will involve a lot of work beyond ‘business as usual’, but in others, most notably Brazil, the existing legal framework and domestic initiatives are already very powerful and should be sufficient to deliver much of the commitment.” Ignacio Gavilan, director, sustainability, Consumer Goods Forum INNOVATION FORUM
  2. 2. PAGE 2 class that wants, among other things, the kind of meat-heavy diet that their counterparts in the industrialised world already enjoy. This demand is driving a global trade that primarily flows from west to east. The US, Brazil and Argentina are the three biggest producers, accounting for 81% of global production in 2013. China’s imports of soy increased 36 times from 1995 to 2013 and in 2015 it imported almost 90m tonnes, a reflection of its increased demand for meat. Much of the growth in the sector has come in Latin America, putting pressure not just on rainforests but also on Brazil’s cerrado grasslands. According to WWF, soy production carries high social and environmental costs due to indiscriminate forest clearing, loss of biodiversity, atmospheric, terrestrial and water pollution, and disregard for local community and indigenous rights. Soy production is usually capital intensive and large scale and in some cases has displaced smallholder subsistence crops. Conversion of high conservation value areas and other critical habitats for soy cultivation threatens biodiversity, endangered species and the livelihoods of local people. It also hampers climate change mitigation, as forest conversion contributes to deforestation, which is a major contributor to climate change. Environmental groups are concerned that the growing global demand for soy will encourage soy farmers to further expand into natural habitats with high conservation values. Other possible sustainability impacts include food shortages and food price increases, while in countries such as India there are concerns over the use of child labour and poor working conditions. Brazil’s forest risks Increased demand for soy has driven unsustainable land use change and illegal forest clearance in Brazil and this has serious implications for the consumer goods companies that are the end users of soy. Little attention has been paid to this trend but consumer goods companies are exposed to regulatory, reputational and consumer risks through their sourcing of soy, just as they were through palm oil sourcing, warns Elly Irving, an ESG analyst at Schroders. The trend is set to be exacerbated later this year, when a soy moratorium in Brazil, introduced in 2006 to prevent companies from buying from farms on deforested land, comes to an end. Alongside Brazil's (controversial and recently revised) forest code, the moratorium was designed to help develop more sustainable forest practices. As the moratorium has been extended eight times already, there is every chance that it will live on. Nonetheless, this exposure is relevant to investors as the associated regulatory risk and potential disruption to supply could result in higher operating costs, lower margins and price volatility for investee companies, Irving adds. There is little evidence that these issues are currently accounted for within company valuations though. The RTRS was set up in 2006 (the same year as the moratorium but three years after the Roundtable on Sustainable Palm Oil) to SUPPLY CHAINS IN FOCUS Soy demand pressures on Brazil's cerrado grasslands The US, Brazil and Argentina are biggest soy producers, accounting for 81% of global production 37% of companies responding to CDP’s forests programme do not report on soy despite stating that they produce or use it Expert commentary “Sourcing companies should seek to implement their commitments in Brazil by firstly requiring full implementation of the forest code by all producers and sourcing of only forest code-compliant commodities, and, secondly, identifying and addressing any gaps between legal requirements and company commitments to eliminating deforestation from commodities supply chains by using existing initiatives in Brazil as far as possible.” Ignacio Gavilan, director, sustainability, Consumer Goods Forum INNOVATION FORUM
  3. 3. PAGE 3 tackle the sector’s sustainability issues. Its original members were processing company Grupo Maggi, NGOs Cordaid and WWF, Swiss retailer COOP, Brazilian farm workers group Fetrauf-Sul and Unilever, one of the world’s biggest food groups. Four years later, it launched the RTRS standard for certified supplies of responsible soy. Today it counts farmers, food processors, food brands and retailers among its 200 members. Certified growers must satisfy 100 criteria that fit into five main categories – legal compliance and good business practices; responsible labour conditions; responsible community relations; environmental responsibility; and good agricultural practices. In 2015, sales of certified soy reached 2.3m tonnes, and while this is just a fraction of the overall market it was more than double the 1m tonnes sold in 2014. The organisation expects a similar level of growth in 2016. Buyers can buy sustainable soy in two ways – either physical supplies or through credits. By buying physical products, purchasers can be assured that the soy was produced and monitored throughout the supply chain as per RTRS standard requirements with complete traceability, which requires the RTRS certification in the chain of custody. With credits, producers can sell responsible soy through the RTRS trading platform. This enables buyers to publicly declare that they have encouraged responsible INNOVATION FORUM SUPPLY CHAINS IN FOCUS production without disrupting their supply chain, says the organisation. One of the challenges the industry faces with regard to sustainable supplies is its sheer scale. It is set up to handle huge volumes of soy in a complex supply chain that spans the world. That makes it very difficult to trace the exact origin of particular supplies, making it problematic to keep track of certified soy. The industry is not set up to handle small volumes, says Lieven Callewaert, the European representative of the RTRS. “If you want to trace soy from one particular field, the supply chain cannot handle that.” Physical supplies of certified soy are therefore more expensive than credits and as a result sales of credits, at 2m tonnes, are much higher than sales of physical soy at 0.25m tonnes. This has led to suggestions that the scheme is greenwashing but Callewaert says: “You have to start somewhere. The key is to create demand for responsible soy. Although the feed business is the biggest user of soy, the biggest driver for change is the retail sector, which is reacting to pressure from NGOs such as WWF. They are creating a real pull effect.” Supplier bonus In Germany, one of the biggest dairy companies, DMK, has incorporated responsible soy sourcing as a guideline for its products, with suppliers receiving a bonus if they buy sustainable feed, while companies McDonald’s Europe has a target for 100% of chickens it sells to be fed with responsible soy The Retailers’ Soy Group, which has members including Ahold, Delhaize and Migros, wants a third of European soy imports (10m tonnes) to be sustainable by 2018 In 2015, sales of certified soy reached 2.3m tonnes – up from 1m the previous year such as McDonald’s, Unilever and Nestlé are introducing sustainable sourcing targets for soy. McDonald’s Europe has a target for 100% of the chickens it uses to be fed with responsible soy, while Unilever has pledged that 100% of its agricultural raw materials will be sustainable by 2020. In the UK, most of the major supermarket chains are members of the Retailers’ Soy Group, along with Ahold, Delhaize and Migros. The group wants a third of European soy imports (10m tonnes) to be sustainable by 2017-18. Further up the value chain, Cargill, one of the world’s biggest commodities companies, has had a partnership with The Nature Conservancy since 2004 to reduce deforestation in the Amazon. It sourced more than 1m tonnes of certified soy in 2013 and 2014. A recent RTRS event – Syntegration – brought together 30 stakeholders to discuss how to achieve 100% responsible soy production by 2020, which looks like a very ambitious target given current sales. Among the solutions discussed were the setting up of national initiatives to follow in the footsteps of the Swedish Soy Dialogue, which has seen 27 Swedish food companies commit to 100% sustainable soy by the end of 2015; securing greater support from financial institutions and greater cooperation with other commodity schemes such as the Roundtable on Sustainable Palm Oil. ★